Securities Industry Commentator by Bill Singer Esq

November 5, 2019

featured in today's Securities Industry Commentator:

In a FINRA Arbitration Statement of Claim filed in October 2018, associated person Claimant Rathmanner asserted common law defamation/libel/business defamation/defamation per se/defamation by implication, negligence, negligent misrepresentation, conversion, unjust enrichment, and wrongful termination. Claimant alleged that Respondent Merrill Lynch had made false and defamatory statements on his Form U5 and on his Central Registration Depository record ("CRD") attendant to what he characterized as his "wrongful termination." Respondent generally denied the allegations and asserted various affirmative defenses. The FINRA Arbitration Panel found Respondent Merrill Lynch liable and ordered it to pay to Claimant Rathmanner $3,750,000 in compensatory damages plus interest and $375 in filing fee costs. Based on a finding of defamation, the Panel recommended expungement of Claimant's Form U5 to reflect that the "Reason for Termination" should indicate "Voluntary" (and conforming CRD changes were further recommended).
In an Amended Complaint filed in the United States District Court for the Southern District of New York, the SEC alleged that online portal Collectors Cafe and its Chief Executive Officer Mykalai Kontilai violated the antifraud and whistleblower provisions of the federal securities laws, and the federal regulator seeks preliminary and permanent injunctions, disgorgement plus prejudgment interest, and penalties. Veronica Kontilai, Kontilai's wife, was added as a relief defendant. The Complaint alleges that the Defendants engaged in a $23 million securities offering based on false statements to investors, and that CEO Kontilai misappropriated over $6 million of investor proceeds. The SEC Release alleges in part that:

[C]ollectors Cafe and Kontilai attempted to resolve investor allegations of wrongdoing by conditioning the return of investor money on the investors signing agreements prohibiting them from reporting potential securities law violations to law enforcement, including the SEC. According to the complaint, these agreements violate the SEC's whistleblower protection rules. The complaint alleges the defendants went so far as to sue two investors that they believed breached one of the illegal agreements. Following the filing of the SEC's action in May 2019, the defendants allegedly have continued to misrepresent to investors material facts about Collectors Cafe's business and the reasons why Kontilai took money from the company for personal expenses, including continuing to tell investors that he loaned Collectors Cafe millions of dollars in the late 2000s when, in reality, he never lent the company the amounts that he claims.

SEC Charges Two Men with Fraud and Unregistered Broker Activity (SEC Release)
In Complaints filed in the United States District Court for the Central District of California, the SEC charged:
with violating the broker-dealer registration provisions of Section 15(a)(1) of the Securities Exchange Act. Additionally, Eden and Pearlman were charged with violating the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and the offering registration provisions of Section 5 of the Securities Act. Without admitting or denying the SEC's allegations, the Defendants have consented to the entry of judgments that include injunctive relief, disgorgement of ill-gotten gains, and civil monetary penalties in the following amounts:

  • Richard Eden: disgorgement of $777,272, with prejudgment interest of $55,147, and a civil penalty of $125,000;
  • Dale Pearlman: disgorgement of $115,000, with prejudgment interest of $13,393, and a civil penalty of $50,000; and
  • Christopher Neumann: disgorgement of $124,100, with prejudgment interest of $14,876, and a civil penalty of $50,000.
As alleged in part in the SEC Release:

[B]eginning in at least September 2014, Eden and Pearlman solicited investors to purchase shares of a microcap issuer, Intertech Solutions, Inc. ("ITEC"). Eden and Pearlman allegedly called prospective investors and convinced them to purchase shares of ITEC in their own brokerage accounts at prices and volumes that were coordinated by Eden, Pearlman, and ITEC's undisclosed control person. ITEC's undisclosed control person simultaneously entered sell orders at the coordinated price and volume, making it highly likely that his sell orders and the solicited investors' buy orders would match. Through this matched trading, ITEC's undisclosed control person was able to offload his shares into a ready market. The Commission previously charged ITEC and its control person for fraud and registration violations. Eden allegedly engaged in similar conduct involving other securities and Neumann allegedly assisted Eden's solicitation efforts while earning transaction-based compensation. The Order found that SSL and SSLS had acted as unregistered commodity trading advisors and that Ross-Mahmoud and Mahmoud acted as unregistered associated persons of both SSL and SSLS. The Respondents are jointly and severally liable to pay a $75,000 civil monetary penalty and to cease and desist from future violations of the Commodity Exchange Act. As allege in part in the CFTC Release:

[F]rom at least July 2018 to March 2019, on behalf of SSL and, later, SSLS, Ross-Mahmoud and Mahmoud solicited customers to open discretionary trading accounts (or supervised other persons who did so), and offered to trade in customers' retail forex accounts through a "forex autotrader." The autotrader used an algorithm to trade multiple currency pairs, automatically entering and exiting trades without customer intervention. The autotrader also purportedly automatically hedged losing trades to mitigate losses. By virtue of the autotrader, SSL and SSLS exercised discretionary trading authority over retail customers' forex accounts.

As found in the order, respondents marketed the autotrader using the slogan "Our Trades, Your Account," and in promotional video presentations, Mahmoud described the autotrader as "95% hands-off" after initial set up. Although customers were required to set up the autotrader and load periodic updates, those efforts were supported by SSL and SSLS staff. Further, respondents touted the autotrader as suitable for people without any prior forex trading experience. Ross-Mahmoud and Mahmoud and, at their direction, the affiliates of SSL and SSLS, instructed individual customers to open and fund accounts at retail forex exchange dealers and link the accounts to the autotrader.
Michael Allen Worley pled guilty in the United States District Court for the Middle District of Louisiana to bank fraud and wire fraud.  As alleged in part in the DOJ Release:

[W]orley executed schemes to defraud both banks and private equity firms by submitting multiple false and fraudulent loan applications on behalf of himself and of businesses he owned or operated.  Between 2014 and 2018, Worley obtained more than $18 million in new loans from federally-insured banks in Baton Rouge and around the country through materially false and fraudulent statements and representations.  Through a similar scheme, Worley obtained at least an additional $11 million from private equity firms in Louisiana and Texas, also through materially false and fraudulent statements and representations.  During the course of both his bank and wire fraud schemes, Worley inflated his assets, understated and omitted his liabilities, misrepresented his income, and often misrepresented other things including the intended use(s) of millions in loan proceeds.  In some instances, Worley and the businesses he owned, operated, or controlled, defaulted on the loans, causing the financial institutions and private equity funds to suffer financial losses. Worley filed for Chapter 11 bankruptcy in January of 2018.   

FINRA Fines and Suspends Broker Who Copied and Pasted Customer's Signature 28 TimesIn the Matter of Brendan James Flick, Respondent (FINRA AWC 2019062550101)
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Brendan James Flick submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In accordance with the terms of the AWC, FINRA imposed upon Brendan James Flick a $5,000 fine and a three-month suspension from association with any FINRA member in all capacity. As set forth in part in the  AWC:

Between December 14, 2015 and March 15, 2018, Flick copied and pasted the signature of a customer on 28 separate wire transfer authorization forms without permission. The transactions were quarterly distributions authorized by and done at the customer's instruction to the customer's account or to accounts belonging to the customer's children, and ranged in value from $15,000 to $139,009. 

After Raymond James personnel discovered the altered wire transfer forms during a routine branch examination, Flick inaccurately denied his involvement and suggested that the customer's son photocopied her signature to assist with the paperwork. 

As a result of falsifying the wire transfer authorization forms, Flick violated FINRA Rule 2010.